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February 25, 2013

Houston, We Have a Spending Problem—News Analysis

Across-the-board spending cuts set to begin this week are an opportunity to be embraced, not a horror to be avoided

Steep cuts in government spending are set to kick in starting Friday—and the handwringing is growing more intense.

New York Times columnist Paul Krugman, who has elevated hyperbole to an essential element of op-ed writing, calls the sequester “one of the worst policy ideas in our nation’s history.” I was thinking slavery and the Tuskegee experiment, but oh well.

The Daily Beast chimed in with a charming catalogue of horrors called “Eight Ways the Sequester Could Ruin Your Life.” On the list were things like scrapping that family vacation to Yellowstone because cuts to the Department of the Interior will force the termination of ranger programs and reduce park admissions. Life just has no meaning any more because I can’t look for Yogi.

The article warned of scarier things, like a future of unwitting horse meat dinners because the Food Safety and Inspection Service will be forced to furlough inspectors.

One wonders, how did we keep Mr. Ed out of our TV dinners in 2005 when the federal budget totaled $2.4 trillion?

At that time the federal budget totaled a little less, actually, than the $2.45 trillion that the federal government collected in taxes last year. And, yet, the Republic survived.

But last year the government spent $3.54 trillion, thus adding (another) trillion-plus dollars to the deficit.

Houston, we’ve got a spending problem!

Starting on Friday, when the across-the-board cuts kick in, the government will be forced to spend 10% less on most budget items, excluding things like Social Security checks.

Americans across the private-sector economy learned to live with 10%—sometimes more—cuts to their paychecks. While unpleasant, they found—they were forced to find—the fat in their personal budgets.

Last week credit ratings agency Moody’s offered a stark reminder of what’s at stake here when it cut Britain’s AAA rating to Aa1 over a debt trajectory unlikely to “reverse before 2016.”

If thrifty Calvin Coolidge were revived from the dead and made president, it’s hard to see how the U.S. debt could turn a corner by that time without making a start on March 1. For that reason, policymakers should consider this sequestration—a political suicide pact that nobody of either party wanted when it was agreed as part of a compromise to lift the U.S. debt ceiling in 2011—as a blessing in disguise.

The cuts could begin a process of restoring balance to the U.S. fisc, and if the suicide pact fells politicians who backed irresponsible choices, that wouldn’t be a bad thing, either.

As in the U.K. case, Moody’s has recently warned it is looking carefully at the U.S. debt trajectory in its future ratings actions. The agency maintains a triple-A with negative outlook on U.S. government debt—in contrast to Standard & Poor’s, which downgraded the U.S. in August 2011.

A renewed focus on balancing expenditures with revenue can set the U.S. on a path to upgrade our national creditworthiness. Spending cuts at the 10% level are painful but eminently achievable. But as countries such as Greece have discovered, steeper cuts are far harder to achieve or emerge intact from. Let’s not squander this moment.